Selway’s style proves his undoing

The contrast could not have been greater between
Mark Selway
’s sudden departure from Boral mid-way through his turnaround plan and the orderly exit of his former boss, Rod Pearse, two years earlier after 10 years at the helm.

But then, the differences between the two chief executives’ management style were always enormous and this was part of the problem in the end for Selway, who is leaving just when his turnaround strategy appears to be gaining traction.

The adjustment from the collegiate culture established under Pearse to Selway’s abrasive and micro-managing style had been extremely difficult, according to insiders.

Strategy and performance aside, Selway’s premature departure ultimately came down to a matter of personalities and style.

The news prompted a collective gasp of surprise as it rippled through Boral’s headquarters in the AMP building in Sydney’s Bridge Street early on Tuesday morning.

Senior managers at the building materials group were concerned about the impact of a leadership vacuum on the company at a delicate time. But on a personal level, many were relieved Selway was leaving the building permanently after a clash of “style" with the company’s board, led by chairman
Bob Every
.

Boral, which downgraded earnings in April after heavy rain on Australia’s east coast played havoc with building projects, now has a leadership hole to fill at a time when it needs it least.

After a decade of underinvestment as previous management waited in vain for the housing market in the United States to turn, Boral is now half-way through Selway’s turn­around strategy which has involved cost-cutting, selling underperforming businesses, write-downs, and a large capital raising.

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Critics say the company is unfix­able and will eventually be broken up. Sources say rivals are already running the ruler over parts of the company, although a break-up is unlikely at this stage.

Boral’s building products chief, Ross Batstone, who is retiring later this year, will hold the fort until a successor is found.

That person faces a string of challenges as soon as he or she gets their feet under the desk.

Deutsche Bank believes the new boss has three vital areas to review: asset values, earnings expectations, and the company’s debt position.

If a projected $25 million in land sales do not come in as expected and Boral cannot achieve concrete price increases due to weak volumes and high costs, the company faces another earnings downgrade.

The new chief executive may also look at reviewing the value of Boral’s assets. Deutsche Bank estimates that the $830 million of goodwill on Boral’s balance sheet includes $486 million from the recent Gypsum Asia acquisition.

While Selway has been selling assets, Deutsche Bank estimates that there are a further $479 million in asset sales to go and that will be difficult to achieve in the current climate, which could result in further write-downs.

Analysts also believe that a capital raising may be necessary should ­market conditions deteriorate ­further, while more internal restructuring, such as merging the sales and marketing divisions, is possible.

Boral’s main problem, according to some of its customers and competitors, is that it has dropped the ball on service and has become arrogant around pricing.

One executive at a former key customer said he switched to CSR after Boral kept trying to push through price increases while its standard of service deteriorated.

Despite the falling-out with some board members and senior management, Boral plans to push on with Selway’s “lean" strategy, which has the support of investors and many analysts covering the company.

Selway inherited a company with a disparate collection of operations including roof tiles, bricks, timber flooring, scaffolding and asphalt.

He reduced the number of divisions, closed unprofitable operations such as its bricks businesses, shut down factories in the United States and Australia and sought to improve productivity.

The strategy, expected to take up to five years to reach fruition, focuses on getting Boral ready for a turn­around in housing starts, something the company has been pinning its hopes on for years.

Boral needs housing starts in the United States to reach 950,000 annually to break even. There are tentative signs of recovery, with housing starts rising to 717,000 in April, but there is still some way to go.

Rival CSR estimated earlier this month that total housing starts in Australia would fall to about 140,000 in the year to March 2013, down from the 148,300 in 2012.

Part of the strategy has been increasing the company’s exposure to the booming resources sector.

Another important focus for the new boss will be driving returns from Selway’s biggest strategic initiative, the $530 million buyout of Boral’s Asian plasterboard joint venture partner, Lafarge.

Boral’s focus has moved from the United States, where earnings have dwindled, to Asia as the company strives to tap into the world’s only growth market for plasterboard in countries such as China, India, and Vietnam.

The jury is still out on whether Selway paid too much for the Lafarge stake.

The consensus is, however, that the lean strategy was necessary and that it is working. But who will replace Selway?

The building materials industry is a specialised community and there are some obvious targets the board will be looking at to succeed Selway.

Speculation has centred on James Hardie executive Nigel Rigby, who recently resigned to move closer to home. Adelaide Brighton’s long-serving chief,
Mark Chellew
, is no doubt capable of doing the job but he is 55 and likes where he is, so he would be unlikely to consider the move at this stage in his career.

CSR’s Rob Sindel and the boss of New Zealand’s Meridian Energy, Mark Binns, who was running Fletcher Building’s infrastructure division until last year, are also seen as potential candidates.

Internally, a majority of Boral’s senior management team has been at the company for more than a decade, which also explains the difficulties Selway may have had penetrating the old culture established under Pearse.

Mike Beardsall, the managing director of Boral Cement, is considered the front-runner among the internal candidates, but there are several competent senior managers, including Frederic DeRougemont, who may put their hat in the ring.

Boral’s critics argue the company cannot be fixed and the new boss will ultimately become a break-up target. UBS analysts last week did the numbers on a break-up scenario, saying Boral’s building products and construction materials businesses have limited synergies between them.

The stock, which reached almost $10 in mid-2006, has fallen sharply in recent years. It closed at $3.42 on Friday compared with about $5.88 when Selway came on board (although the declines are largely due to weak housing and construction markets rather than Selway’s performance).

Except for Adelaide Brighton, the sector has been doing it tough. Boral’s one-year total return is down 25.58 per cent compared with a fall of 40.85 per cent for CSR, 25.53 per cent for Fletcher Building, and minus 0.73 per cent for Adelaide Brighton, according to Bloomberg.